Some small businesses that did not previously apply for the research and development tax credit may be eligible for retroactive tax credit back to 2020 even if we did not recognize it earlier. The tax credit might be six to ten percent of the amount spent, including wages, on qualifying projects, that will reduce your future wage taxes. This is a wage tax credit, so it is only available to businesses that pay wage taxes. The projects do not have to be successful to claim the tax credit. We can repeat tax credit claim process for each year 2020, 2021, 2022 and 2023 and 2024.
In many cases I did not suggest this to microbusinesses earlier because we were not aware that IRS would allow more liberal application of the rules for this program, and because I thought that the allowable dollar amounts made it less attractive. But now I see that it may be a profitable project, especially if we tackle all years together for greater efficiency.
I suggest that we review your past business expenses to look for spending on equipment and projects that were intended to improve processes, products sold, improve efficiency, and lower costs. By identifying and documenting these efforts, we may be able to retroactively claim the R&D tax credit and potentially reduce our tax liability for those years. This could result in significant financial savings and help us reinvest in further innovation and growth.
If we identify $10,000 of qualifying spending in each of the last four years and the credit is 10% of the amount spent, we could start 2025 off with a tax credit of $5,000. Certainly worth exploring. For more information, see this FAQ published by the IRS: https://www.irs.gov/businesses/corporations/research-credit-claims-section-41-on-amended-returns-frequently-asked-questions.
I hope this helps spark a year-end tax planning idea. But don’t wait: we have only until January 10 to claim any missed tax credit for 2020. I will be available most of the time this month and next to discuss the possibility.